Friday, April 29, 2005

A few years ago one of the bear stories on telecommunications equipment makers was the efforts of a Chinese company, Huawei Technologies, to enter that space with—no surprise—extremely cheap product.

Testosterone-rich Silicon Valley largely laughed off the threat.After all, Huawei traces its roots to the Chinese Army—not exactly the fountain of technological ingenuity that its Israeli counterpart has proven to be. And despite being China’s largest telecom vendor, it was hard to envision a Western newcomer like Huawei creating, selling, installing and supporting complex, mission-critical systems around the world.

But things got serious in 2003, when Cisco sued Huawei for allegedly copying Cisco router technology—so closely that an index to the Huawei user’s manual was distinguishable from Cisco’s only because of “a slightly more frequent use of decorative stars on the paper,” according to a Forbes story at the time.

The lawsuit was settled, however, and Huawei has wasted no time: just yesterday British Telecom selected Huawei to supply routers and access equipment as part of an eight-member consortium handling a $19 billion upgrade of the UK’s phone network.

Marconi Corp, which had been a huge BT vendor, was shut out of the deal, and its stock fell 38% yesterday.

For Marconi, not to mention Cisco, Alcatel, Nortel and all the other "tels" out there, it only gets harder from here.

Jeff MatthewsI Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, April 27, 2005

I know an FBI agent. Good guy, family man, and very interesting to talk to. He's worked 25 years in the business and seen it all.

A couple of years ago he came back from Guantanamo Bay, where he’d interviewed prisoners from the war in Afghanistan. The prisoners—to his surprise—had a great deal more in common with the criminals he’d experienced in the U.S. than with the great religious crusaders he’d expected to find in the makeshift pens of Guantanamo Bay.

For starters, religion wasn’t the issue for most of the men: they were fighting for the loot. Low birth order (being number five or six out of seven or eight kids in a family) often explained their dropping out of the family and winding up in the jihad, as it also frequently explains young men who leave their families and wind up in jail here in the U.S. Also, many of the men had alcohol and drug problems, like their U.S. counterparts.

But the most common element, according to the agent, was this: whatever they were caught doing—no matter how baldly they were caught in the act—it was never their fault, ever. It was always the other guy's fault—the guy who didn’t get caught:

“I was just a waiter in a restaurant when Mustafa began firing at the soldiers…” “I never had a gun—Khalid had the gun…”

“Mohammed made me get them the ammunition…”

I was thinking about these prisoners of Guantanamo Bay after hearing of Monday night’s appearance of Overstock.com CEO Patrick Byrne on Jim Cramer’s “Mad Money” television show.

As he does on conference calls, Byrne apparently spent great energy putting the blame for his company’s problems—and they are, in my view, vast—on the media and shorts, including me and this blog. Indeed, like those prisoners of Guantanamo Bay, Byrne seemed to blame everybody but himself for problems which, looking at the record so clearly spelled out in conference call transcripts and his own expansive quarterly shareholder letters, are in reality nobody's doing so much as his.

In my 25 years' experience of investing in and shorting stocks, it is a standard tactic, of CEOs whose companies eventually come to grief, to “blame the shorts.” Enron CEO Ken Lay, for example, squarely credited his company's crisis not on the fictitious numbers, but on “the shorts.” (Even if you're sick of Enron, you should read the new and excellent account in “Conspiracy of Fools”: the background to the fraud is not only compellingly told, but it is highly instructive for investors of all stripes.)

Indeed, my very first post on Overstock.com and Byrne, “When CEOs Obsess,” arose from his finger-pointing on Overstock's January 28th conference call. Byrne attacked not only short-sellers and the media, but snidely referred to Pacific Growth analyst Derek Brown as “my old friend and naysayer.” Brown's mistakes, apparently, being that he didn't recommend the stock, and he dared ask skeptical questions on otherwise back-slapping “great quarter guys”-type Overstock conference calls.

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My this-CEO-has-issues radar went up half-way through that January 28th call.

(Look no further than the case of Paul Jain, a now-convicted criminal who once ran a public company called Media Vision, for a terrific example of CEOs Who Obsess: Jain blamed shorts and journalists for his company’s problems. His best quote, as I recall it, came during a rant aimed at Herb Greenberg, a journalist who did one of the best jobs of financial sleuthing on record by exposing Jain’s fraud: “the shorts will rot in hell.” Of course, that remains an open issue, but Paul Jain himself did time here on earth...while Greenberg happens to be the same journalist who first began to raise questions about Overstock.com.)

And when, towards the end of that January 28th conference call, Byrne allowed a supposed stranger named “Bob O’Brien” to lay out an ignorant, paranoid, and almost entirely fictitious analysis of how something called “Naked Short-selling” was destroying NASDAQ stocks in general and Overstock.com in particular...well, I began to pay special attention to “Doctor” Byrne and his track record at Overstock.com.

And what I found was extraordinary, even in the annals of “CEOs Who Obsess.”

Examples are too numerous to mention here—please read the three-part “Mystery of the 38 Diamonds” elsewhere on this blog for a recap of the more egregious examples of how Byrne's boasts of new ventures and grand opportunities have come to little.

But until last week's earnings report and Byrne's weird explanation of his massive diamond play, it was that January 28th conference call and the apparently sham “question and answer” session Byrne conducted with "Bob O'Brien," a man who claimed to be a stranger, that stayed with me.

After being introduced by the conference call operator, O’Brien introduces himself to Byrne, saying his name “is not familiar” to Byrne, but he, O'Brien, is a shareholder who can explain the short-attack on Overstock and others.

(“Bob O’Brien” is not the real name of the Overstock conference caller—he uses a pseudonym, claiming fear of retribution from the shorts; more likely he fears prosecution for threatening the families of short-sellers through message board posts under his other pseudonym [“dirtydirtydeeds”] in which he lists wives, children and home addresses of those who offended him).

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Byrne likewise pretends not to know "O'Brien" even though two men had been in contact for several months prior to that call, according to Bryne's own message board posting two weeks later:

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2/15/05 "Obrien called me for the first time

shortly after the October conference call.

He talked about all of this…"

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Isn't that something? The CEO of a public company pretending he didn't know a guy during a long conference call with investors.

But it gets better: as the January 28th transcript shows, the two men continue with a ten or fifteen minute back-and-forth in which "Bob O’Brien" describes a paranoid conspiracy theory which Byrne pretends to be hearing for the first time:

"O’Brien" (to Byrne):

“I don’t even know if you know this, but Overstock has been listed on 5 different German exchanges. They’re in Frankfurt, in Berlin, Munich—you’ve got one other one. I am just going to guess that you didn’t call and ask for that.”

Byrne (to "O'Brien")

“It’s news to me.”

Towards the end of their little one-act play, Byrne furthers the apparently deliberate deception that he knew nothing of what “O’Brien” was saying:

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Byrne (to "O'Brien"):

“You know a heck of a lot more about it. I buy toasters and sell toasters….I don’t know any of the stuff you are talking about but it is interesting stuff.”

However, one month after these exchanges, on February 28th, Byrne himself wrote on his message board:

“By December of 2004 we found ourselves listed on five exchanges in Germany and one in Australia. Someone had gone to all the trouble to get us listed on these exchanges…”

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I am no professor of logic, nor am I an FBI agent or an attorney or a regulator. But based on the conference call transcripts and Byrne's subsequent message board postings, it would appear to me that not only did Byrne know who O'Brien was, but, as CEO of a public company, he deliberately misled listeners on his conference call by staging a supposedly spontaneous question-and-answer session.

Now, should this ever become an issue, Byrne's reaction will likely be to blame the shorts, Herb Greenberg, Jim Cramer, this blog, the Trilateral Commission, or all five together.

But none of us forced Patrick Byrne to pretend he was talking to “Bob O’Brien” for the first time in his life on a conference call with investors; or made him pretend he hadn't already been told his company's shares had been listed (for whatever purpose) on German exchanges; or directed him to say, for the benefit of shareholders, short-sellers and investors alike, “I don’t know any of the stuff you are talking about” on January 28, 2005 when he apparently already did know it "by December 2004," to use his very own words.

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Imagine, for a minute, that Jeff Immelt, the A+ CEO of General Electric, for whatever reason, allowed a man using a false name to get on the GE conference call with investors, pretended they didn't know each other, and then let the man describe a ficticious conspiracy by Siemens' healthcare people to illegally undercut GE medical equipment, for the purpose of drawing regulatory scrutiny of Siemens Medical...

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And imagine that Jeff Immelt later disclosed that he had known the man and had already heard the Siemens conspiracy theory prior to the call with investors....

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Would not Jeff Immelt be fired, in about ten seconds, by the GE board of directors for misleading investors, shareholders and the media alike?

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Makes you wonder why the Overstock.com board has not looked into the Byrne/O'Brien conference call, or the various cases where Byrne's hype never matched the results, whether it was "Project Rocket" or "Project Ocean."

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Perhaps the board stopped listening after Byrne told the Wall Street Transcript back in 2001 that by the year 2004 "I would want to see us well over $400 million and as profitable as hell. Making a ton of money. I want to see that next year."

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Or, maybe, as the FBI agent discovered with the prisoners of Guantanamo Bay, the Overstock board knows that that whatever it was that happened on that call, it wasn't Patrick Byrne's fault.

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Which would also explain why that same board allowed its CEO to go out and make a speculative diamond buy for $7.2 million, described as "the steal of a lifetime," not long after the company had just finished writing down the last of his previous large speculative buys: $5 million worth of Franck Muller watches.

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We will be exploring that diamond "steal of a lifetime," and, perhaps, other facets of the Overstock saga later in the week.

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Jeff MatthewsI Am Not Making This Up

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The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

(Actually, it was a lack-of-earnings report: Overstock lost twice as much money as most analysts were expecting, and surprised the Street with a huge ramp-up in technology costs and a laundry list of “ mudpies,” a Byrnesian term for “money-losing things we did.” This for an operation that had supposedly been cutting-edge on the technology front, but, as Byrne now admits: “we’ve grown past the stage that we can do things with Excel spreadsheets and hand calculators.”)

Does this apparent absence of connection between the reality of Overstock’s failure to dent eBay’s auction machine and the boldness of Byrne’s “long war of attrition with eBay” proclamation remind anyone besides me of the Black Knight, in MontyPython and the Holy Grail?

Recall the dark forest setting in which the loud, brash Black Knight boldly confronts King Arthur, gets his left arm cut off (“I’ve had worse”), then his right arm (“Just a flesh wound”), then one leg (“Right, I’ll do you for that!”). Finally, when his remaining leg is cut off, the Black Knight declares: “All right, we’ll call it a draw.”

In much this very manner does Patrick Byrne, the Black Knight who only a few months ago metaphorically confronted Meg Whitman with his boast that Overstock's auction business had launched "far faster than eBay's first 15 or 20 days," now describes his failure in yet another "skunkworks" project as: “a long war of attrition.”

If Byrne wasn’t the CEO of a public company, you’d think the same thing King Arthur thought as the armless, legless Black Knight screamed “Oh, oh, I see, running away then. You yellow bastard! Come back here and take what’s coming to you. I’ll bite your legs off!”

Which is to say, “You’re a loony.”

Among the many problems at Overstock, too numerous to mention in just one post, Byrne’s auction site has been as much a failure—by any objective measure—as any in the long list of Overstock’s let-downs. But don’t take my word for it. Here’s one of the “power sellers” who made the leap from eBay to Overstock, and clearly regrets it.

Sun Apr 24, 2005 5:29 pm: We really need the support right now. There are a few things I believe need addressed…

First, sub-categories. Many of us have been asking for these since September of last year. I was unhappy when we were told it would not be until the first quarter until they were finished. I knew it would be April, but still, nothing has been accomplished that we know of on this….We were asked for our opinions at least three times, with no results. Maybe you guys didn't get the results you were looking for, because we have answered the question so many times….

You need to really start listening to us….as many of us are depending on this site solely for our income. Yes, my husband works, but I always was the one to pay all of the bills from my online sales while he paid the mortgage. I haven't been able to pay any bills in the past two months.

In conclusion, we now all have to pay for our listings, as far as I know. When there are no sales, many are going to leave..... I am not trying to be hard or disagreeable, this is just my business, and I want it to work on Overstock...otherwise, I will have to go back to eBay. I have no choice.

To quote the Black Knight: "'The Black Knight always triumphs! Have at you! Tis but a scratch..."

Sunday, April 24, 2005

The driver was middle-aged, animated, friendly, and he spoke with enough of an accent that I asked where he was from originally.

“Greece,” he said, looking at me in the rear-view mirror.

“Ti kanis,” I said. (“How are you?”—about the full extent of the Greek I picked up in ten years of morning coffee at the Greek diner in Greenwich.)

“Kala,” he answered. (“Fine”) And we were off and running, talking about houses and kids and family. It just so happened he grew up in the mountainous region of Greece near Albania, where Debby, the waitress at the Greek diner, had also grown up and recently bought a house. (It looks amazingly like the mountains around San Jose, California...without the houses, smog and highways.)

We were having a great time. He was extremely talkative, almost too talkative—my daughter got out her iPod when he got involved in a very graphic description of the two colon operations he had undergone starting last fall. Way too much detail for her. But he and I had a good conversation almost all the way to JFK.

Almost all the way.

As we drove over the Whitestone Bridge, I pointed out the New York skyline to my daughter, who turned off her iPod to ask me about the buildings. I pointed out the spire of the Empire State Building and the Citicorp building with its trapezoid roof.

“Where were the Towers?” she asked.

I pointed to the hump of buildings rising from the lower end of Manhattan, and started to feel that hollowness that comes with all the sudden memories of 9/11. Being in the business I am in, I know a lot of stories about what happened that day, and they are not good stories.

Figuring the driver probably had his own 9/11 story, I asked where he’d been when the towers were hit. And that was when the conversation all changed.

“I was at doctor’s office,” he said. “It came on the news…” He shook his head. “You know, a lot of people in Europe don’t believe what happened…”

I felt a little twinge. “I know,” I said. “And they’re idiots.”

“Well…it was strange, you know?” He looked at me in the rear-view mirror.

“No. What was strange?” I was hoping he wasn’t going where he appeared to want to go. It could get very ugly very fast.

“Those planes, they take over how many planes? Six?”

“It was four.”

“Okay, four. And how do those planes go 500 miles and nobody does nothing about it?”

I was getting ripped, and also hoping my daughter wasn't listening. The funny thing is, he didn't seem to be arguing from a deep-seated ideological conviction, nor was he trying to provoke me. He just seemed oblivious. “They took over the planes, turned off the transponders, and nobody could see them. What’s the controller supposed to do? Say ‘Oh my God they’re flying it into the Trade Towers?’”

“Well, why they did nothing?”

“They thought it was being hijacked. Before 9/11, hijackers took planes to Cuba.”

This was news to him, as it probably was to most people under the age of 40. Oddly enough, an analyst-friend of mine was on a plane that was hijacked to Cuba in the 1970's. He was flying from Chicago to a job interview in New York, and had called in sick from work—and the plane got hijacked and he ended up on an airstrip in Cuba.

Like all good analysts, my friend Todd took notes of the whole experience while it happened, on a legal pad. Fortunately the hijacking ended without violence, and Todd got home safely, although with a bit more fanfare than he’d hoped for when he snuck out of town for the day to interview in New York.

Unfortunately, Todd left the briefcase—and the yellow pad with the details of the whole hijacking, from start to finish—on the plane.

I didn’t tell the driver that story, because I had stopped talking to him. For one thing, I didn’t trust myself. For another, I had concluded he was a moron.

So I turned to the sports section and read about the Mets.

I am rooting for the Mets this year—after 40+ years of Yankee fandom—because I like Willie Randolph. I met Willie once, and found him to be the nicest, friendliest, most disarming sports hero I’ve ever met. Not that I’ve met too many, but he was great. Somehow we got into discussing his contract negotiations with Cincinnati, and he talked to me like he'd talk to his agent or to a reporter he'd known for ten years.

Also, I’m sick of the Yankee/Red Sox arms buildup, which is resulting in nothing but a bunch of highly paid old guys going at it. So I am rooting for Willie to turn it around in Queens. And I decided to focus on an article about Willie and his presence in the Mets dugout, rather than get into with a moron.

The driver persisted in talking—but not about 9/11. He switched to a different subject: a proposed bridge to be built between Alaska and Russia.

“That’s ridiculous,” I said without looking up. “Who’d use it?”

“Oh, I would,” he said. “What an experience!” He described how “they” had worked out technical difficulties, such as icebergs crashing into the base of the bridge (the piers would be circular, not square, so the icebergs would glance off the bases).

So, I thought to myself, you’re driving 50 miles across the most dangerous straights in the world, a thousand miles from civilization, winds howling and snow blowing and icebergs glancing off the base of the bridge. But, hey, you could drive to Siberia.

He talked about the idiotic bridge until we got to the Jet Blue terminal, and my daughter and I got out of that car as fast as we could.

***

Still, I learned a lot from the drive. It explains human behaviour as ridiculous as Michael Jackson fans who stand by that bisexual predator, no matter how gruesome the evidence; and as disturbing and depressing as Holocaust-deniers.

In any event, I’m looking forward to some relaxation at Disney World. Given the strong Euro and weak Dollar, I expect a lot of Europeans here, riding Splash Mountain and Thunder Mountain Railroad.

I hope they enjoy themselves, especially the ones who believe 9/11 was a fake. They'll be right at home in the Magic Kingdom.

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Meanwhile, my nephew Danny is stationed in Iraq, along with other U.S. troops doing their part to make sure America doesn't "fake" another terrorist attack somewhere else around the world.

Friday, April 22, 2005

Don’t get me wrong: it is an extremely profitable rut. But it is a rut all the same.

Right now, for example, I am typing the draft of this blog on a Microsoft Word program that came with the Microsoft Operating System that came with my Sony notebook.

The only reason I use Word is that Microsoft has a monopoly on operating systems, and you can’t buy a regular old personal computer that doesn’t come with Microsoft software, which is too bad, because Microsoft software is terrible.

By that I don’t mean it doesn’t work, it's just that because Microsoft has a monopoly and sells Microsoft Word to everyone who uses a computer, Word is crammed with every single thing everyone who uses a computer might need, like "Palatino Linotype" fonts.

Which makes Word less like something a really creative software company invented, and more like something the old Phone Company would have come up with.

For example, there are more than 30 little buttons in the “Tool Bar” at the top of this version of Word, each with a symbol so that writers can merely click a button to accomplish a task. “Tool Bars” are cool, helpful devices that took some of the mystery out of using word processing programs, and I am pretty sure Microsoft did not invent them.

Microsoft was not ever in the business of inventing cool, helpful things. Microsoft saw other companies come out with cool, helpful things—like spreadsheets and word processors and calculators and databases and the “graphical user interface” itself—and copied them like Chinese companies copy American technology without ever paying for it and sell it for an impossibly low price.

When you have a monopoly—whether it's a country or a software developer—you can do that sort of thing.

In any event, some of the symbols on my Microsoft Word “Tool Bar” are easy to grasp, like the little icon of the floppy disk, which is clearly the “save” button.

Others are not so easy to grasp, such as the little greenish circle that looks sort of like the earth, only it has a chain beneath it. I am thinking this is the symbol of Microsoft owning the world monopoly on desktop computer software—millions of shlubs all around the world, chained to software that offers Palatino Linotype fonts and eighteen-zillion different ways to format text….but if you accidentally hit the ‘insert’ button you will type over things you’ve already written.

The most ridiculous part of the ‘insert’ button is that the only time I type over things I’ve already written is when I’ve accidentally hit the ‘insert’ button.

If Microsoft had the monopoly on car engines, I suspect there would be a dashboard button with some fancy symbol on it, which, if you pressed it by mistake, would instantly stop and restart your car engine, even if you were doing 80 miles an hour on Interstate 95.

And the only time you would ever know you had a function like that for your car is when you accidentally pressed the ‘restart engine’ button, right in the middle of Interstate 95.

But I digress.

After I finish writing this in Word, I will then copy it onto my Blogger Dashboard, which is Google’s blogging service. Google provides the blogging service for free.

Unlike Microsoft software, Google's blogger is actually as simple to use as it says it is. And furthermore, unlike Microsoft software, when you have a problem with the Google blogger and you send an email to the Google Blogger Help Desk, somebody actually responds.

I had a problem with the Microsoft Network email last year. It was not the first time I ever had a problem with it, but it was an unusually bad problem: nobody was getting my emails. When the problem went away after a day or two, I emailed the unhelpful Microsoft Help Desk, and received an email saying they couldn't help me two months later.

I am not making that up.

So here we have two companies whose products I use every day:

1. Microsoft, whose motto could be "$35 Billion In Cash But No Tech Support," which makes overengineered NASA-type products, and charges monopoly pricing to people who have no other choice.

Before you answer, consider this: Microsoft only gets paid once when somebody buys a computer. It’s a lot of money, and it’s at obscene profit margins—monopolies being what they are. But it’s still only once in the life of that computer.

Google, on the other hand, has a chance to get paid every second of every minute of every day by somebody somewhere using the Internet who clicks on an ad Google has placed on one of those searches or maps or satellite images or blogs you have used. It’s a tiny piece of change, not being monopolistically priced operating system software. But the pennies add up. (Last week's earnings report showed just how quickly those pennies are adding up for Google.)

And I will bet money that right now every half-smart Microsoft employee is thinking “Who needs this Fixing-Longhorn-Bug-Number-19,852 nonsense when I could be creating something really cool—like Google Maps...for a company with a future instead of a past?”

And since Gates can never duplicate Google and roll out a copy at a lower cost to the user like he did all those tool bars and spread sheets and GUIs—because Google is free—he can’t stop it.

The problem is, BearingPoint hasn't set much of a direction for itself.

Where do I get off saying this? Well, there are, the company web site brags, 16,000 "professional" BearingPoint employees running around the world, right now, straightening out other companies--integrating them, consultating with them, servicing them.

"On April 19, 2005, our senior management determined that the financial statements ...should not be relied upon because of errors in those financial statements...

"...The Division of Enforcement of the SEC advised the Company that it was conducting an informal investigation. The SEC staff requested that the Company produce various documents, including documents concerning internal control deficiencies...

"...If we were required to repay the 2004 Credit Facility before securing an alternative source of financing, we would have limited remaining cash resources and our ability to operate our business would be materially impaired. In such event, if we are unable to obtain an alternative source of financing, we may be forced to pursue alternative strategies as we will not have sufficient liquidity to operate our business in the ordinary course and remain a going concern..."

In short, BearingPoint is a consulting company that can't manage itself. And it may not remain around as a "going concern."

But it does, however, have a cool name.

Meanwhile, many great companies are out there, creating value for shareholders and employees and retirees and consumers--P&G, Wal-Mart, Nike, to name a few--without feeling the need to explain exactly what their name means, and without internal control deficiencies or going-concern problems.

But then again, those companies aren't consultants to other companies. Imagine how the world might look if BearingPoint itself actually had good management!

Somewhere down the road to corporate integrity, I'd like to see BearingPoint change the description of its name to something more honest:

"The name BearingPoint means we paid millions of dollars to a bunch of name-consultants and that's what they came up with."

The major media chains, and the minor ones, too, all seem to have one thing in common: business stinks.

Said the New York Times:

"Our large-market newspapers, The Times and The Globe, were flat or down in advertising revenues in the quarter, as categories such as telecommunications and banking were adversely affected by industry consolidation. Our largest properties were also affected by the timing of Easter..."

Said the Dow Jones Company's Peter Kann, a gloriously incapable executive who has, nonetheless, retained his position as chief architect of that franchise's erosion:

"We continue to battle a persistently difficult B2B (business-to-business) print advertising climate particularly in the technology category.... However, heading into the second quarter, we are cautiously optimistic that advertising trends will improve."

Said the Tribune, where advertising revenues were up a non-whopping 2%:

"Newspaper advertising revenue growth was solid in January and February, although March was negatively impacted by the timing of the Easter holiday. In television, our results reflected overall industry softness and the impact of Local People Meters in our major markets."

No apologies from Yahoo, however, where advertising revenue rose 54%. And the total dollars involved--a billion worth--are not trivial any more. Online is firmly where it's at.

And you would think the media chains would clearly understand that, because every one of them noted strong growth in their online sites--30% at the New York Times alone. But they somehow fail to make the inverse connection to the decline in their core business.

Instead, they blame it on Easter--which apparently came out of the blue and without warning on March 27th. And, of course, the dreaded and terribly disrupting Local People Meters.

Tuesday, April 19, 2005

Now that AIG has been unmasked as a fake-the-numbers blue chip, Coca-Cola comes along and settles SEC charges that "Coke repeatedly inflated sales and misled investors by shipping $1.2 billion of extra beverage concentrate to bottlers in Japan, one of its largest and most-profitable markets, during the three-year period" of 1997 to 1999, according to today's Wall Street Journal story on the matter.

Seems that Coke "stuffed the channel"--a term more common in the high-tech industry, where the HPs and Compaqs and IBMs of the world do their best in the last few days of a nail-biting quarter to ship product out the door in order to book it as "revenue," and thus "make the number."

Channel-stuffing is far more common than anyone on Wall Street would like to think: a friend of mine who came out of the venture capital world found it very hard to invest in any tech company at all. "I know what these guys go through the night the quarter ends to hit the numbers," he told me. "You don't wanna know."

Sort of the business world's version of not peeking into the kitchen of a restaurant if you want to enjoy the food.

In any event, Coke apparently has come clean to a fairly straightforward scam: offering end-of-quarter deals to bottlers in Japan such that the bottlers' inventories jumped 60% over a three year period in which actual sales of Coke only rose 11%.

That's quite a stuff-job.

Quothe the Journal:

"The scheme enabled Coke to meet Wall Street profit targets in eight of the 12 quarters, the SEC said. While the sales technically were legitimate, Coke failed to disclose their existence or financial impact, concealing its full sales and profit condition."

The elephant in the room, of course, is the Oracle of Omaha, Warren Buffett. Buffett, who loudly and publicly demands integrity first and foremost among his co-workers and the companies in which he invests, sat on the Coke board during the entire three-year period in which the company's executives were feverishly stuffing the daylights out of the Japanese channel.

And this was, apparently, not some rogue manager in Japan: "the SEC said Coke executives in Atlanta participated in the scheme."

Does Warren Buffett not know how to read a balance sheet? Did he not wonder how Coke was growing unit sales 60% in an 11% market?

Perhaps Buffett is more easily snowed than anyone would believe: he also served on the board of Gillette, the razor maker which P&G recently agreed to buy, during its channel-stuffing days a few years ago.

As for his recent involvement in the blossoming AIG scandal, Buffett, no doubt, is on the side of righteousness and goodness...but, still, his baby, Geico, was on the other side of the table dealing with a man who appears to be going down hard.

One wonders--after Coke, Gillette, and AIG--if the same brush of scandal that has tarnished all three former infallibles will ever reach the feet of the Oracle of Omaha.

Monday, April 18, 2005

One nice waspy-looking couple says to the other, "We sold our two-bedroom in the Village at a great price and bought the Virgin Islands."

Thus, in the April 18 issue, The New Yorker adds to its inventory of market-topping cartoons that have appeared, with uncanny regularity, at extremes since the magazine's founding in 1925. This one surely marking some sort of peak in the real estate bubble.

It struck me especially after recently looking through the huge book of New Yorker cartoons with our younger daughter. She didn't grasp many of them, especially those related to the stock market, topical economic events and of-the-moment business celebrities.

An early-90's Roz Chast "Martha Stewart Takes Over The Universe" panel is especially out-of-place now, while the Internet bubble is best summed up in the year 2000 cartoon showing two airline pilots at the controls of a large jet, one exclaiming, "This is so cool! I'm flying this thing completely on my Palm pilot!"

(My favorite, less frozen-in-time internet era cartoon is the bum on a plane sitting in First Class next to a very well dressed businessman, saying, "I got my ticket for three dollars over the Internet. Are you going to eat that salmon?")

Other eras are all marked with their own, dated cartoons. From the mid-70's energy crisis to the 1929 crash.

In 1981, with the stock market still adjusting to Volcker's inflation-busting Fed policy, and a year away from beginning the great 1982-2000 bull market, the New Yorker summed up things this way:

"On Wall Street today, news of lower interst rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down, until the realization that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a reimposition of higher interest rates."

Saturday, April 16, 2005

Driving from West Palm Beach airport to my mother's home in Stuart, Florida is about an hour's drive, all in. Normally, the time goes by quickly because the rental car is a Hertz, and, since Ford owns Hertz, the car has satellite radio.

Today the car was a Kia, and it did not have satellite radio. So our daughters and I wrestled with old-style, terrestrial radio, and hated every minute of it.

Contrary to the assertions of the old-style radio CEO I met with at a conference earlier this week (described in "Much Ado About Nothing?"), old-style radio has limited choice, lousy audio quality, and way way too many commercials.

We re-discovered the sad state of affairs of Generic Mainstream Corporate Radio Mediocrity after trying unsuccessfully to locate a station that was actually playing "music" as opposed to commercials or station jingles. Finally, I hit the "scan" button and let the stupid radio simply run through the entire FM band, one station at a time.

At the lower end were a couple of gospel stations, then a mix of Hispanic, Classic Rock, Hip-Hop, Oldies and "Z-100" stations (about 13 in all). And the few that were accidentally playing "music" at the time the scanner sampled them, were all playing the same "music" their equivalent formats play up North. Generic Mainstream Corporate Radio Mediocrity struck again.

One of our daughters slipped on her iPod.

Finally, however, after about thirty minutes, I struck gold: the scanner picked up a station playing "music"--in this case, "Light My Fire." And it was the extended "Light My Fire." Bliss.

Bliss, until we drove out of the range of that station and "Light My Fire" faded into "I Just Called To Say I Love You," followed by extended commercials, disk-jockey chatter about the weather (there is not much variation in the weather in Florida), and extended commercials.

Did I mention the commercials?

The entire trip was a sixty-minute advertisement for satellite radio.

I have, in the past, had a hard time justifying the valuations of the two satellite radio choices--Sirius and XM. I am now convinced that, over the very long run, those valuations may prove reasonable; probably for XM rather than Sirius, which has a handicapped business model owning to its inferior technology and low OEM market share with the auto makers.

Nevertheless, at this stage, I have an open mind. Informed opinions are welcome.

Friday, April 15, 2005

Like Japan retreating across the Pacific Ocean from its 1942 high-water mark—one island at a time—IBM has been selling or spinning off pieces of business as each became untenable for a high-cost, U.S.–based conglomerate.

The first to go was printers, sold off by Lou Gerstner on the cheap to a leveraged buyout group, which turned it around and resurrected it as publicly-traded Lexmark. IBM left quite a few billion on that particular table, although the positive impact on IBM’s P/E multiple from his “hardware-light” model compensated the Gerstner faithful.

Printers were followed, in no particular order, by hard drives, which IBM had pioneered, and the Wintel PC business, which IBM had invented.

IBM continued its transformation from low margin hardware to high margin software and services by acquiring a lot of software cats and dogs (including Informix—remember that one?) plus—for $3.5 billion—the Price Waterhouse consulting business.

Meanwhile, IBM tried to sign every IT outsourcing deal it could, and successfully convinced analysts to focus on IT services bookings as opposed to things like revenue growth, which have never met stated goals in the last five years.

Unfortunately, Jamie Dimon recently decided JP Morgan could handle its in-house IT better and less expensively than IBM, casting a shadow on the face of the new IBM which the Wall Street cheerleaders chose to ignore, until last night.

Last night came IBM’s doubly surprising earnings report—it was four days earlier than expected, and it was lousy. The data reveal starkly the shallowness of the IBM makeover. Earnings, excluding the change to option-expensing, for which I applauded IBM here a few postings ago, were 10% light. And services bookings were down 10% year over year.

I take back the good things I said about IBM for leading the switch to option expensing: the company is back to its old beat-the-number-by-a-penny shell games (which, under Gerstner, included using pension surpluses and the sale of real estate and intellectual property to make numbers), hinting to analysts of impending layoffs and a charge next quarter that will enable the company to, well, beat-the-number-by-a-penny in subsequent quarters.

So, for the “new” software-oriented, services-oriented IBM, the question is “now what?”

Don’t look for answers on the Street. The most un-helpful advice out of a whole batch came today from Goldman Sachs, whose tech research team appears to be trying to out-do its oil research team’s top-ticking “$100 a barrel oil” call of last week (you can look up the exact date of the bullish Goldman call on a chart of crude, and just find the day crude spiked up to its peak—from which it is down more than 10% today). Goldman is telling investors there is no need to buy IBM today, but no need to sell, either.

(Google calls them nothing at all—one day, without so much as a press release, a new and usually highly slick function will appear on Google search. You could say Google takes the Warren Buffett approach to new ventures: less talk, more rock.)

Given Overstock's spotty history with such "skunk-works projects"—including the fizzled “Project Rocket” and the less-than-earthshaking “Project Ocean” —a cynic might refer to them not as "skunk-works projects" so much as "Hail-Mary passes."

In any event, the “skunk-works” project in this mystery is the company’s “Build Your Own Ring” function within the jewelry site of Overstock.com, announced with fanfare in January:

“We have opened our own Build Your Own Ring site. Something like Blue Nile. But it is where you can think of the diamond industry, up to $1,000 is really controlled by Zales and Wal-Mart and mall jewelers and Blue Nile operates average order size is about $5,500. We intend to dominate in the $1,000 to $5,000 range. Fantastic pricing."

It sounded good, it sounded exciting—in fact, it sounded like all “skunk-works” projects from Overstock have sounded, at first. (Recall early reports of the “mCommerce” shop-by-mobile phone phenomenon: “We decided that there would be an opportunity to lead the field..."; or the online auction business: “It’s…far faster growth than eBay saw in their first 15 days….”)

The key, of course, is the follow-through, and here the reality—as with “Project Rocket” and “Project Ocean”—does not appear to be cooperating with the ample vision of Dr. Byrne.

For starters, the diamonds offered on the “Build Your Own Ring” site at Overstock do not squarely fit the $1,000 to $5,000 price range Overstock intends “to dominate” with “fantastic pricing.”

Of the approximately 2,800 diamonds available at launch, 582 or so were priced at $5,000 and higher while another 490 or so were priced below $1,000. So roughly a third of the diamonds were offered at price-points outside "the range."

Some of them way outside the range.

There were 14 diamonds offered at $25,000 a piece and up; 50 at $20,000 a piece and up; and more than 120 at $15,000 and up.

In fact, over $3 million of the total value of diamonds offered on the “Build Your Own Ring” were offered at $10,000 a piece and higher, while the total value of all diamonds offered at $5,000 a piece and higher was more than $5 million.

Granted, this $5 million should be put perspective. After all, if one-third of the diamonds were priced outside the $1,000 to $5,000 price range, then two-thirds were priced within the range. And these numbered approximately 1,750 diamonds.

Stated value of 1,750 diamonds "in the range"? Roughly $2.7 million.

So, having put it in perspective, we discover that the “Build Your Own Ring” site offered over $8 million in stated value of diamonds: $5 million worth at $5,000 a piece and higher; and less than $3 million within the $1,000 to $5,000 range Overstock intends “to dominate” with “fantastic pricing.”

Now, about that $8 million worth of diamonds.

After announcing the new site, and the price range he intends “to dominate,” Byrne went on to speak about what appeared to be the source of the diamonds being offered on “Build Your Own Ring”:

"We did a $7 million deal on diamonds that was the steal of a lifetime. Just fantastic pricing in there."

(How Overstock came to getting "the steal of a lifetime" on loose diamonds is another mystery, and not the subject of the Mystery of the 38 Diamonds. I take Byrne at his word that he somehow purchased $7 million worth of diamonds at an unusually attractive price, despite the fact that the diamond supply chain is tightly controlled, and not at all an inefficient market.)

Assuming an Overstock-type markup of 15% on those $7 million worth of diamonds, they would appear to be the same diamonds being offered for sale at the time of the launch.

So, how is "Build Your Own Ring" actually doing? Well, once again, it would appear, based on a careful monitoring of daily sales on “Build Your Own Ring” starting in late March, that reality indeed bites.

One diamond was sold March 29—price range $1,000 to $2,5000—and another on April 2, same price range. Then again on April 4, same price range.

Pretty slow.

But on or about April 7, something interesting happened: 38 diamonds vanished from the available inventory. I say “vanished” because it is impossible for an outsider to determine whether the 38 diamonds were sold, or otherwise removed from available stock. Either way, there were 38 fewer diamonds spread across various price points.

Furthermore, if the missing 38 were indeed sold, it is likewise impossible to determine whether they were sold one at a time to 38 different people—unlikely given that the previous single-day sales record tracked since March 24 had been a whopping one—or sold in a batch to a single buyer.

It is, however, possible to identify the price ranges from which the “missing 38” vanished: one was a $25,000+ stone; four were in the $17,500 to $25,000 range; four in the $10,000 to $12,500 range; six in the $5,000 to $7,500 range; and 23 in the $1,000 to $5,000 range.

Total value of the 38 diamonds newly missing: approximately $220,000.

It would be quite a coup for Overstock if the sudden vanishing of those 38 diamonds represented a sudden upsurge in ring-building on its “Build Your Own Ring” site. Going from the occasional one-a-day to 38 is exactly the kind of “tsunami” CEO Byrne once predicted for “Project Ocean.”

But just as suddenly as the 38 diamonds flew out the door one way or another, Overstock customers suddenly resumed building their own rings at a more measured pace—one more on April 8, in the $1,000 to $2,500 range. And none since.

Which makes the Mystery of the 38 Diamonds even more of a mystery than if those 38 were the start of something big.

Like previous Overstock mis-adventures—from The Enigma of the Sputtering Rocket to The Vanishing Naked Shorts and its sister case, The Stranger on the Conference Call—The Mystery of the 38 Diamonds will, no doubt, be followed by other adventures in the casebook of Patrick Byrne and Overstock.com.

It is also likely that certain of these new adventures will begin with a "Project" allowed to ferment in shrouds of mystery, its fanciful code-word hinting of grand aspirations ("Project China," perhaps, or "Project Google-Killer," maybe), designed to tantalize Wall Street analysts and perhaps result in the "super-sizing" of the Overstock.com P/E ratio.

And they may even, one day, prove more successful than "Rocket" or "Ocean" or "Build Your Own Ring."

In the meantime, we watch and wait for an explanation to The Mystery of the 38 Diamonds.

Perhaps you, reader, were the one who bought those 38 diamonds—all $220,000 worth. We'd love to hear about it.

Wednesday, April 13, 2005

In The Mystery of the 38 Diamonds, Part I we explored five Overstock.com cases in which events failed to bear out the lofty pronouncements of the company’s erudite, professorial CEO, Patrick Byrne.

For the record, there is nothing inherently wrong with a business that tries new things and makes mistakes. It's part of what keeps good companies growing. But jumping on fads, trends and ventures that don't pan out might, after a point, look more like an effort to pump up a stock than a logical plan to rejuvenate a business model.

Today we explore several more Overstock cases, the first up being The Mystery of the Shallow Ocean.

In early 2004 word began to spread on Wall Street of a new Overstock “skunkworks” project, labeled “Ocean” by the label-loving Byrne. As one analyst reported:

“Project Ocean is still being kept tightly under wraps but is expected to be disclosed by the end of the summer. The project requires patents to be filed and will cost roughly $1 million.”

When the wraps were pulled off “Ocean” it turned out to be an auction site. The timing couldn’t have been better: like most of Byrne’s new ventures that have managed to “super-size” the P/E of Overstock.com shares, “Ocean” road the coat-tails of a very hot trend—online auctions—whose poster-child, eBay, had gained mainstream acceptance as a major transactional platform.

Byrne almost immediately began to spread the big news about Ocean's strong start:

9/30/04: just giving an idea of how fast this is taking off...since our launch last Friday: …Sometime around 5 A.M. this morning we passed the mark of 4,000 auctions. 66% of completed auctions are clearing (I think eBay is 44%?)

He followed up this exuberant first report with a certifiable whopper:

10/22/04: It's-- so far, my belief is, it's far faster growth than eBay saw in their first 15 days or 20 days.

It would be hard to imagine how almost any new auction site—with the aid of $2 million in start-up costs (Byrne's number) and the availability of Overstock’s existing customer base to jump-start usage—could fail to beat eBay’s “first 15 days or 20 days.”

After all, it took far more than 15 or 20 days for eBay to become a cultural and business phenomenon. Back then, eBay was merely one man’s online marketplace for collectors of Pez dispensers.

Nevertheless, Byrne continued to compare Overstock to eBay—and claim that in some cases Overstock auction was doing a better job than eBay:

1/28/05: [Our auction conversion rate is back] to the 35 to 40 range…. They [eBay] say that they have a closing rate in the 40s…. But if you remember they count it differently than us. …I wouldn't say we are higher than them but…

The eBay power selling community are very sophisticated people and they are doing all kinds of tests and there are certainly areas on our site where they are getting better results than they do on eBay.

Yet, in fact, after a brief surge following eBay’s February fee increase, Overstock’s auction listings stalled out at the 150,000 level and have more or less steadily declined. Listings recently cruised in at a slight 122,000.

A glance at individual categories—antiques, for example—reveals the problem: of the next 100 Overstock antiques auctions to close, only 8 have multiple bids. Thus, the “Ocean” does not appear to be very deep at all.

The Case of the Reappearing Merchandise might be one of the biggest unresolved Overstock mysteries.

Overstock describes itself as an “online ‘closeout’ retailer offering discount, brand-name merchandise”—in other words, “overstocks.” Pretty straightforward. Byrne himself commented on one of the limitations of being a closeout seller early last year:

“We can't reorder most of the stuff. We just can't reorder most of it. Almost all of the stuff is not reorderable.”

Yet Overstock appears to be doing just that in certain cases.

A “Newport Coffee Table,” for example, was featured in pop-up ads on March 31, thusly:

Yet that same coffee table re-appeared—in the same “Almost Sold Out” pop-up ad, at the same price—on April 1, 2 and 3. And again a week later.

The strangest thing is that right now—April 13—the very same Newport Coffee Table is still for sale on Overstock, although not identified as a "Sell out Risk."

Either the “Newport Coffee Table” did not have a high sell out risk as advertised, or product has been reordered. Most likely from Sitcom Furniture.

Who or what is “Sitcom Furniture?” Sitcom manufactures in China:

Sitcom's fastest growing division is our direct import/private label program. Customers can select items from our current product line to ship directly from the factory either FOB or on a landed basis. We have also developed a number of exclusive products for customers who can sustain long-running container programs, with annual volumes ranging from 2,000 to 24,000 units per item.

And “Newport” is one of the furniture lines offered on the Sitcom web site.

If indeed Overstock is importing product manufactured for Overstock, as opposed to surplus furniture manufactured for Ethan Allen or Bombay, it might help explain one other thing besides the Mystery of the Reappearing Merchandise: the dramatic increase in Overstock gross margins over the last year, which Byrne credited to “tightening our logistics costs and better merchandise buying.” Margins on direct imports from China, such as the furniture manufactured by Sitcom, could run far higher than Overstock’s targeted 15% gross margin and help explain the "better merchandise buying."

A more recent Overstock mystery, The Vanishing Naked Shorts, and its sister case, The Stranger on the Conference Call, are the last to be reviewed here, before we get to the final Mystery of the 38 Diamonds tomorrow.

Sparing the gory technical details that are at least as boring to write as they are to read, Byrne became fixated on the notion that, because shares of Overstock.com appeared on the “SHO Threshold” list, the company was under attack by a pack of “Naked Shorts”—short sellers who fail to correctly borrow stock prior to selling it short.

Naked shorting is illegal, and, as anyone who has been in the investment business longer than two weeks would know, stupid.

But in his most recent earnings call, Byrne allowed an investor, who goes by the name “Bob O’Brien,” to explain at great length how a supposed “Naked Short” attack was being perpetrated on Overstock.com, along with a number of other, lesser companies.

Byrne pretended not to know “O’Brien”:

Byrne (to the operator):

There was a guy, Bob O'Brien.

O’Brien:

Yes, I'm on the line. Thank you for taking my call, Dr. Byrne. Congratulations on a great quarter.

Byrne:

Thank you very much.

O’Brien:

You…probably, the name is not familiar. Let me start out by introducing myself. I’m a shareholder, and also a retired guy. I think I can explain what is going on with your stock and, basically, why so many people are saying mean things about you.

Byrne:

I would love to know that.

That little one-act play, in which Byrne and O’Brien pretended not to know each other ("the name is not familiar"), continued with a long, fanciful, and—to anybody who has been in the investment business—absurd tale involving German share listings and all manner of regulatory complicity, which Byrne listened to, and prodded along, with rapt fascination, as if he had never heard it before.

But Byrne indeed knew Mr. O’Brien, for they had spoken shortly after Overstock's October 2004 conference call.

.

Unfortunately for both actors in that play, the lynchpin of their Conspiracy Theory has gone away. Overstock.com shares no longer appear on the on the SHO Threshold list. The Naked Shorts have vanished.

Which leaves one remaining question: why did the CEO of a company pretend on a conference call with investors that he had never heard of or spoken with a man, of whom he had heard and with whom he had spoken?

Why would the answer to this question matter? Well, in the words of Warren Buffett—whom Byrne frequently quotes:

“We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.” From the Berkshire Owner’s Manual.

The Mystery of the 38 Diamonds concludes with Part III, here, tomorrow.

Tuesday, April 12, 2005

Like a series of old-fashioned Hardy Boys adventures, the Overstock.com story, as told through the words and writings of CEO Patrick Byrne, contains mysteries aplenty—each with its own twists and turns—that leave outside observers guessing each outcome until a final conclusion is revealed.

In the Hardy Boys' cases, the ending was always the same: Hardy brothers Frank and Joe, sometimes with the help of their good chums Chet and Biff, would unravel the mystery, catch the true perpetrator, and receive hearty thanks from dear old Dad, Detective Fenton Hardy, along with mild but affectionate admonishments from Mother.

Overstock.com’s adventures, however, do not always tie together so neatly. Some are easily resolved, others not. Why, a new mystery appeared just last week.

But to begin with, I offer a two-part recap of the adventures thus far.

One of the first Overstock mysteries was The Riddle of the Disadvantaged Artisans, arising from a 2001 Overstock venture known as “Worldstock.”

“Worldstock is the brainchild of Overstock.com’s CEO, Patrick Byrne,” the company trumpeted in a 2002 release, “who holds a doctorate from Stanford University centered upon issues related to poverty and social justice.” (The doctorate is important to Byrne: he made certain Charlie Rose’s viewers knew about it during a recent interview.)

Byrne “conceived of Worldstock as a global network of disadvantaged artisans plugging into the modern advantages of a 21st century business.” The concept was a genuinely noble effort to nurture third-world artisans by offering their hand-crafted wares on the Overstock site—“our own little United Nations Development Program.”

Setting a pattern for subsequent Overstock mysteries, the company (in the same 2002 press release) boasted that the “overwhelming popularity of Worldstock among Overstock’s customers” had led to its swift expansion among the disadvantaged artisans—then stopped mentioning Worldstock until the CEO’s 1/28/04 letter to investors, where Byrne gave it “Overstock’s 2003 ‘Most Improved Player’ award” for a “remarkable turn-around.”

“Turn-around” from what was not entirely clear, but Worldstock has since disappeared from discussions, save in a brief, feel-good mention during the Charlie Rose interview.

The odd thing about such a radical enterprise is that each item under the “Worldstock” tab gets listed just like any other Overstock item—with a “List Price” and a substantially lower “Our Price.” The difference being a huge theoretical savings for the Overstock buyers—and by definition, lost profit to the “disadvantaged artisans.”

For example, a “Turkoman Hand-Knotted Rug (Afghanistan)” comes with a $1,400 “List Price” and a $449.99 “Our Price.” Now, take at face value the company’s noble statement that “Overstock adheres to an audited net-5% profit ceiling for their [the disadvantaged artisans] goods, stimulating sales at prices that maximize the artisans’ return.”

At a $449.99 “Our Price,” it would appear that the disadvantaged Turkoman rug artisan is receiving something like $425 for a rug that would “List” for $1,400. Hardly seems like the way to end poverty and social injustice.

In The Case of the Vanishing Milestones, the company introduced a membership loyalty program called “Club O.”

Byrne promised shareholders, “I will announce it if and when we reach the following levels: 10,000; 25,000; 50,000; 100,000; 250,000; 500,000; 1 million,” noting “I do not anticipate that we ever will reach 1 million members, or anything close to that, but if we do, I will let you know.”

For a while there it looked like Byrne might have an easy time announcing those milestones. After a company visit just two months later, Legg Mason analyst Thomas Underwood wrote “Given the success that Overstock has already seen in its ‘Club O’ campaign, the company will introduce ‘Club O Gold’”

Shortly thereafter, Byrne announced his first “Club O” milestone—it had breached 10,000 members. But he also pulled the plug on the milestone pronouncements:

“I previously promised to inform shareholders when certain thresholds had been reached…I now withdraw that commitment because I have trouble sleeping with open-ended commitments.” (7/22/04)

Apparently Byrne knows how to sleep, because “Club O” numbers—while not forthcoming from the company—were placed at something above 40,000 in a late-2004 analyst report estimate, a good bit closer to the low end of the 10,000 to 1 million range than to even the middle of that range.

The Mystery of the Pristine Inventory began in early 2004, when Byrne told investors:

“In the closing weeks of 2003 your chairman seized an opportunity to buy over $5 million of Franck Muller watches…they represent a sizable fraction of our inventory. Pick one, write me…and I’ll make you a deal.”

One year later, Byrne announced a large inventory clean-out, which cost the company $1.5 million.

“The dead inventory that I had accumulated over the years, both from my own bad buys and those that I let buyers ‘put’ to me, has been almost entirely flushed (including the Franck Muller watches).”

However, on the investor call the next day, he led investors to believe there was nothing left in the way of “dead inventory”:

"I decided in early December, let's just flush everything that has been around more than a few months. Our inventory has never been this clean. We just marked down, promoted, did whatever we had to do to blow out the older inventory. I lost $1.5 million on that inventory to move it all. But our inventory has never been this pristine."

It is not clear whether the inventory is “pristine,” as stated to the analyst community, or whether some “dead inventory” remains, as implied in his shareholder letter.

The answer may partly be found in the brief Case of the Forgotten Movie. Here, another big Byrne bet—a film called “FarenHYPE 9/11”—went from “a unique business opportunity” (10/21/04) to $700,000 worth of losses in just a couple of months (1/28/05).

The Enigma of the Sputtering Rocket was the first involving several “skunkworks” projects at the company. Byrne delights in tantalizing shareholders and Wall Street alike with Hardy Boy-esque code names for projects from the so-called “skunkworks.” This one was named “Rocket,” and it began some time in early 2003, when something called “mCommerce,” which stands for “mobile commerce” (commerce conducted via cell phones), became a short-lived faddish buzzword:

“We decided that there would be an opportunity to lead the field with a push-based mCommerce application that delivered special bargains to subscribers.”

After some delays, Byrne announced a break-through in April of 2004:

“We have applied for a patent on push-based mCommerce and a certain kind of transaction through mCommerce. I think you're going to hear a lot more about mCommerce. It's like the Internet of five or six years ago. And I think people ought to look hard at different companies that are emerging in there.”

Never lacking in ability to jump on a trend that might, to use a favorite Byrne phrase, “super-size” the P/E in shares of Overstock.com stock, he wrote:

“To give an idea of the size of this market; there are 150 million cell phones in the U.S….”

Shortly thereafter—three short months later, in fact—Byrne admitted the obvious:

“I am not giving up, but this has been a dud… mCommerce just has not yet caught on in the United States. If and when it comes, Overstock.com has staked out some high ground without a huge investment.”

Next up in this three-part series will be The Mystery of the Shallow Ocean—a rather involved tale involving yet another “skunkworks” project...

Monday, April 11, 2005

Denial can sometimes be useful. Denying yourself chocolate chip cookies, for example, if you want to lose weight.

But denial in the sense of being in denial…of not admitting the truth, or not being willing to see the what is happening around you—that is usually a dangerous thing. Especially so in human beings as well as in companies, where adaptation to changing circumstances is a key to longevity.

I bring this up after witnessing a stupendous example of denial today at a question and answer session with the CEO of one of the larger owners of radio stations in the U.S., whose stock has been depressed by concerns over satellite radio’s impact on the radio business.

When asked about this matter, the CEO (who otherwise had spoken quite plainly and logically about his business) dismissed satellite radio as a fad. And when I say “dismissed” it, I mean it.

Here’s a few quotes about satellite radio, from the CEO:

“Much ado about nothing.”

Primarily aimed at “gadget guys,” not “the soccer moms” who make up the typical radio listener.

To believe the “hype” you’d also believe that “everybody would be eating a Krispy Kreme donut and wearing a Taser on their belt.”

In sum, “it’s vapor.”

Now, I am not suggesting that satellite radio is going to immediately kill off terrestrial radio, or that there will never be the need for local radio once satellite has taken a large share of the market, or that this company is a bad company whose stock should be sold.

But, you would think that the CEO of a business under a threat—real or imagined—would at least acknowledge the threat and spend a little bit of time thinking about how to deal with the threat.

Saturday, April 09, 2005

Just 10 weeks ago, Standard Pacific Corp, one of the largest homebuilders in the nation, reported an excellent fourth quarter and full year 2004 to investors.

Nothing unusual there—all homebuilders, except a few laggards, have been reporting record results since well before the the Fed Funds rate reached a microscopic 1%.

But, more than crowing about the past, Standard Pacific’s CEO was quite ebullient about the future, and his forecast for 2005 at that time is worth noting:

"We are also positioned for another record year in 2005. Our positive outlook for the year is bolstered by our record backlog of over 6,300 pre-sold homes valued at $2.1 billion, which represents approximately 55% of our projected 2005 revenues. In addition to our strong backlog, the economic and housing fundamentals remain healthy in most of our larger markets.“To support our 29% increase in projected consolidated deliveries this year, we are planning to open between 130 and 140 new communities, up approximately 40% year-over-year.

"We expect our successful expansion efforts into the Southeast to have a significant impact on our unit growth in 2005. In only our third full year in Florida, we are projecting to deliver 3,800 homes, a 62% increase over the 2004 delivery total. In addition, Florida is expected to surpass California as our single largest state based on unit volume."

That was then.

More recently, Standard Pacific’s business appears to have turned on a dime—or, rather, on the seventh Fed rake hike since the 1% days of 2004. On April 5, the company reported thusly:

“New home orders companywide for the first quarter of 2005 were down slightly from the record level achieved a year ago, consistent with our expectations for the quarter. The order levels reflect generally healthy housing market conditions in the Company's three largest markets: California, Florida, and Arizona, and flat to gradually improving housing market conditions in the Carolinas, Texas, and Colorado.

“Although new home orders were down year over year in Southern California, absorption rates in the first quarter improved over the sales rates experienced in the second half of last year…. In Northern California, new home sales were down 26% on a 27% lower active community count. The Company continues to experience healthy demand for new homes in this region.“New home orders were down 18% on an 18% increase in active selling communities in Florida. The lower sales rate per community during the quarter reflected a conscious decision by the Company to reduce the number of new homes for sale due to strong backlog levels. This adjustment in our rate of new home releases should better align sales with our production capabilities. The Company is generally experiencing healthy housing market conditions in all of its Florida markets.”The change in tone—from heady blue-sky cockiness, to convoluted explanations about lower home orders—is one good reason why homebuilders have such low valuations, despite years of terrific results: they live in a business that is as cyclical as a business gets.

That cyclicality—and its attendant risk—has not been apparent during the multi-year drop in interest rates.

Thursday, April 07, 2005

There's an inventor who's solved the world's energy problems, and he needs only a minimum of $200,000 to get started.

But don’t take my word for it: click on over to the Overstock.com auction site, go to the Real Estate section, and look at the “Featured Item” as it appeared late yesterday.

If it no longer appears—having been snapped up by some fast-fingered, foresighted mogul-to-be—I apologize for not alerting our readers sooner.

But it’s not as if there’s much to look at on the Overstock auction site—listings have flattened out, bids are low and it looks as if Patrick Byrne's conference call boast that Overstock's auction site outperforms eBay in certain areas is hokum. Consequently, the availability of such a unique opportunity (free, renewable energy) took even me by surprise.

I repeat the item as it appeared—capital letters, grammar and all:

Electric VehiclesI'M LOOKING FOR A INVESTOR OR INVESTORS. I NEED A MINIMUM OF $200,000 TO GET STARTED. I AM TAKING PEOPLES PERSONAL CARS AND CHANGING THEM OVER FROM GAS ENGINES TO ELECTRIC DRIVEN MOTORS. THESE VEHICLES WILL NEVER NEED PLUGGED IN. THEY WILL RECHARGE THEMSELVES AS YOU DRIVE . THIS IS THE PERFECT TIME FOR THIS TO HAPPEN. WITH HIGH GAS PRICES THAT ARE NOT GOING TO COME DOWN, THAT'LL MAKE THIS A VERY HIGH DEMAND TO HAVE DONE NOW. IT WILL SELL ITSELF.

SO IF YOUR LOOKING TO INVEST IN THIS GREAT OPPORTUNITY ,THEN EMAIL ME [address deleted] FOR MORE INFORMATION. LET'S MEET AND TALK OVER A CUP OF COFFEE OR A DRINK. IF YOUR READY TO DO IT NOW THEN GO AHEAD AND PUT YOUR BID IN ON IT. I'M READY TO GO WHEN YOU ARE. WE'LL BE RICH AND FAMOUS.

THANK YOU, [name deleted] CANTON, NORTH CAROLINA

THE PICTURE IS AN ELECTRIC DRIVEN PICKUP TRUCK. I DID NOT BUILD THIS TRUCK.

Wednesday, April 06, 2005

After years of fiercely resisting stock option expensing by most Silicon Valley companies, IBM steps forward and announces plans to do just that.

The magnitude of the deception by which companies—both high-tech and not—handed out stock options to reward employees without reducing “expenses” for purposes of the almighty “Earnings Per Share” calculation has always been easy to calculate from the footnotes of the offending companies.

The offending companies, however, persisted in looking at things the “pro-forma” way, options excluded, and Wall Street mostly obliged, despite the fact that the whole point of reported earnings is to calculate the amount of income left over for...shareholders.

The cleverest ruse of all may have been perpetrated by Dell, which not only grants stock options up the proverbial wazoo, but then boasts to Wall Street about the massive share buybacks it undertakes as a vote of confidence in its own shares.

The fact is, Dell has to buy back massive amounts of stock simply to offset the extra shares created by option exercises: all that money spent to buy back shares in the marketplace simply means Dell is running in place. The cost of “running in place” now approaches a billion dollars a quarter, for Dell. And it is many billions for other companies, Cisco included, that are also hooked up to the option-grant-intravenous-line.

The notion that employee compensation in the form of stock is somehow different from cash and therefore not reportable on the statement of income leftover for shareholders is, and always has been, a scam; and it only took a major bubble, dozens of bankruptcies, and billions of dollars lost by investors to force a change.

But better late than never.

As a result of IBM’s willingness to come forth and expense the cost of option grants properly, we now learn that IBM’s earnings available to shareholders are 10% lower than previously expected. 2005 earnings estimates are going from the $5.60 a share range to the $5.05 range, using the Bear Stearns numbers.

Think of that 10% this way: it is the hidden cost of being an IBM shareholder.

Tuesday, April 05, 2005

Either way, in an interview downplaying the rise of satellite radio in today’s New York Times, Hollander, who is the CEO of Major Mainstream Generic Radio Company Infinity Broadcasting, sounds exactly like Wile E. Coyote looks when he realizes the light at the end of the tunnel—which the Coyote just finished painting on the canyon wall to thwart the Roadrunner—is in fact a train coming straight at him.

“At the end of the day, people want to hear what’s going on in their local markets,” Hollander tells the Times, disputing the importance of satellite radio. “People are emotionally involved with local radio.”

Now, I understand what Hollander means when he says local radio is important: I wake up every morning to the local radio station, first for the weather—especially this past winter when schools in New England were cancelled every three days—and second for news about whatever Connecticut politician got indicted the night before.

And besides, once people get in their cars, they’re not listening to that local news station anymore: they’re listening to a syndicated national program like Imus in the Morning or Howard Stern, both of which are, incidentally, brought to you by that Major Mainstream Generic Radio Company, Infinity Broadcasting.

Furthermore, the biggest radio draws the rest of the day are, likewise, nationally syndicated shows such as Rush Limbaugh, Delilah, and Casey Kasem. Not local radio.

Me, I don’t drive to work—and when I do drive, it’s either Civil War books on tape or conference calls, so I don’t have satellite radio. But every time I rent a car I get a Ford with Sirius Satellite Radio: it’s indispensable.

As today’s Times article points out, Sirius has six country music channels—that’s almost as many regular Major Mainstream Generic Radio channels you can pick up on a car radio. I’ve never counted but there are at least that many rock channels—hair metal, thrash metal, metal metal—not to mention a 60’s channel, a 70’s channel, an 80’s channel and a 90’s channel, plus reggae, ska, blues, Elvis (literally: an entire channel devoted to The King)…or, talk radio from left wing to right wing and everything in between.

Meanwhile, on my “emotionally involving” Clear Channel Major Mainstream Generic Radio Station, I can, if I get tired of the limitless choice and unheard of variety on satellite radio, hear pretty much any commercial ever made, with a few songs squeezed in between. And sometimes the songs aren't even the same twelve songs they were playing yesterday!

Which is why satellite radio has grown faster than cell phones, according to the article.

None of which Joel Hollander wants to hear. After noting the competitive response from Infinity, Clear Channel and other radio-killing corporations—including expanded playlists and fewer commercials—the article gives Mr. Hollander the last word. He says, “This book won’t be written for another 10 years.”

On that I agree: the book about the demise of Major Mainstream Generic Radio won’t be written for 10 years.

Apparently Jay finally got around to reading Friday's A+ Wall Street Journal story describing the downfall of AIG Strong Man Hank Greenberg...the most pertinent detail being the description of Greenberg yelling, King Lear-like, at his restive, scared directors as they contemplate his ouster: "You couldn't even spell the word insurance."

One wonders, given his low opinion of his own board, why Mr. Greenberg chose them in the first place. On the other hand, it explains how AIG finds itself in its very fine mess.

Today's installment of the unraveling of yet another Wall Street fave finds that Greenberg's own closely held company (Starr International) has forced off its board AIG executives not a part of Mr. Greenberg's palace guards. Starrr International not only owns 12% of AIG stock, it controls AIG's deferred-pay and investment plans for AIG executives. How'd you like to be an AIG veteran trying to sort out the Greenberg mess, knowing King Lear controls your pension!

The plot thickens, but don't look to Merrill Lynch for guidance. They’re busy shutting the barn door, not realizing the horse is gone.

Saturday, April 02, 2005

In college I did a rotten thing to the features editor of the Lehigh Brown & White—which was, indeed, the actual name of my college newspaper. (The Lehigh sports teams were called “The Engineers” back then, so I guess the “Brown & White” wasn’t so horrible by comparison.)

Sitting around a table with friends at Smuggler’s Tavern one night, we decided for some reason (drafts were 25c, as I recall, which was probably the reason) that it would be a good idea to create, out of whole cloth, a punk-rocker supposedly giving a concert at a venue nearby.And I would write a review of the fake concert for the Brown & White.

The idea arose from two facts: one, The Ramones had just taken over the New York music scene with an album, "The Ramones," that had made Led Zeppelin seem bloated and irrelevant; and two, among the friends sitting around the table was a guy named Mickey who announced his goal in life was to be a punk-rocker like Joey Ramone.

So, in the space of an hour or two, we created a disturbing young individual named “Jus Mick,” gave him a back-story that might seem believable given the out-of-nowhere success of The Ramones, and plotted how to get the whole thing in print, which, unfortunately for my editor at the paper turned out to be a lot easier than we imagined.All it took was an 8x10 glossy and a press release.We took pictures of the real Mickey in the alley behind our apartment, wearing a leather Ramones-style jacket, with combed-down hair and a cigarette hanging casually from his sneering lips. I then wrote a fake press release announcing the concert, and we sent the press release and the 8-by-10 black-and-white glossy of the hot new punk rocker “Jus Mick” to the features editor of the newspaper.Sometime later I followed up with a call to the editor and volunteered to review the concert, and she gladly gave me the assignment.

To this day I have no idea why we went to such extraordinary lengths to conceive and execute a plan that involved more effort than we put into other activities such as term papers, for example, or final exams. There was just something about The Ramones that made people do things, stupid things.I think it was that picture from the first album cover: they looked impossibly cool, dangerous, hard...and the music sounded exactly the same way.

I never saw them live, but even on film the shows were like nothing else. Joey, the singer with a ridiculous amount of black hair, would say something unintelligible to the crowd (he looked a lot like “Thing” on the Addams Family, and you were never sure what was his front or his back).

Then Dee-Dee would scream “ONE-TWO-THREE-FOUR” (although he might have in fact been screaming “How do I love thee? Let me count the ways,” for all you could hear actual distinguishable words)...then there would be a brief, split-second pause before the music started, and blew the doors off the place.Two minutes later the song stopped like somebody pulled the speakers—no Zeppelin-style Jimmy Page fifteen minute guitar noodling, no John Bonham shoot-me-please drum solo.Just stop.

Then a brief mumble from Joey and suddenly, out of the darkness, Dee-Dee again screaming “ONE-TWO-THREE-FOUR” (or, perhaps, “My love is like a red, red rose”), and blam—another two minutes of total Ramones sound.

Which is why, back in 1977, our friend Mickey wanted to be a dangerously cool punk rocker called “Jus Mick.” (The name came about after much intense debate when Mickey himself said, “How about just ‘Mick’?”)

In my review, I gave “Jus Mick” a very dangerous, Iggy Pop-style persona, breaking beer bottles over his own head, crawling around the stage on the broken glass and throwing himself into the crowd (I do not believe the term mosh pit had been created back then). The deception did not merely involve describing “Jus Mick” on stage however—I had to create opening acts as well as songs, lyrics, and the fans themselves.

The Brown & White published my review in its entirely, including the picture of a leering, leathered, middle class Junior named Mickey, in an alley a block from campus. We congratulated ourselves that night at Smuggler’s and went about the rest of our college experience, which mainly, to the best of my recollection, revolved around foosball. I didn't give it another thought.Then, a week or two later I got a phone call from the editor asking if I could meet her at the cafeteria.I went. She was sitting at a table, not looking too happy.“There’s a rumor going around that the review you wrote was a fake, that there’s no such band,” she said. She looked at me the same way she might have looked at her father after hearing from her older, meaner brother that the family dog had been put to sleep, hoping against hope that her father would deny it.

I told her it was true. “I made up the whole thing.” I said it straight out, because I couldn’t figure out how else to say it.Her face flushed and her eyes brimmed, but she did not cry. “Why?” she said, as if he father really had put the dog to sleep.I don’t recall what I told her—something along the lines of “It seemed like a good idea at the time,” probably. I then realized what I'd never considered: that what had seemed like a harmless and very cool prank had actually cost her some standing at the paper.It had consequences, although not for me, except that I felt badly for her and still do.

Looking back on it, I’d like to think “Jus Mick ”paved the way for “Ali G.” (If you’ve never seen Ali G, get the DVD.) In reality, it was stupid, and, in the full sense of the word, sophomoric.But the Ramones could make you do that.

I thought of Jus Mick for the first time in years while watching “The End of the Century,” the retrospective on the Ramones recently out in DVD form.

It’s fascinating, amazing, terrific stuff, filled with personalities, egos, humor and pathos.It's also quite funny at times: interviewed while seated at his home studio drum kit, Marky Ramone wearily recites the old criticisms of the Ramones' fast-eighth-note drum style being too simple and repetitive to be considered real music...then suddenly launches into a slamming John Bonham-style, everything-goes, over-the-top speed-demon drum solo, stops abruptly and says “See, I can do that.”It's perfect: it's what the Ramones were all about.

I recommend "End of the Century" to all music junkies and newspaper editors…including my old editor at the Brown & White.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.